Australia's Economy after Floods/Earthquakes

1

Spiros Papadopoulos

Senior Economist, Global Markets Research

18 March 2011

Australia after the floods

Global economy strengthening, but risks remain

2

● Middle-East tensions raising oil and gold prices

● Global inflation rising

● ECB and BoE preparing for rate hikes

● China still strong, and still tightening policy

● US economy improving

● Devastating earthquakes in Japan and NZ

● Australian growth affected by floods in short-term, but medium term

outlook remains strong and wage/price pressures trending higher

Floods to inflict heavy growth damage this quarter in Australia

3

-0.4-0.20.00.20.40.60.81.01.21.41.6

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Old Post floods

CPI Headline inflation q/q% forecasts, pre/ post floods

Food priceshit

Source: NAB Global Markets Research

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12

Old Post floods

GDP forecasts q/q%, pre/ post floods

Risk of anegative

print

Source: NAB Global Markets Research

Actual Q4, 0.7%

QLD growth was already soft - weak property mkt and high AUD

4

State Final Demand

NSW VIC

QLD WA

Tasmania SA

Source: Reuters EcoWin

04 05 06 07 08 09 10

Pe

rce

nt

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5P

erc

en

t

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

5

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11

QLD

Australia, ex Qld

NAB Business Conditions, Queensland vs Rest of Australia

Source: NAB Survey, NAB Economics

3 month average

Actual

3m

average

QLD economy has underperformed since the GFC

QLD economy has underperformed since the GFC

6

Domestic Demand: Australia vs Queensland

Australia (Domestic Final Demand) Queensland (State Final Demand)


87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Pe

rce

nt

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0P

erc

en

t

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Australian economy had been softening before the floods.

Households cautious and retail sector subdued in 2010

7

Annual % change, $ sales

Retail sales, QLD & Australia

Australia QueenslandSource: Reuters EcoWin

02 03 04 05 06 07 08 09 10 11

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0P

erc

en

t

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

8

House price growth has eased after interest rate increases

Dec Qtr Annual

% Change % YoY

Sydney 1.6 7.4

Melbourne 1.3 10.8

Brisbane 0.7 0.7

Adelaide 1.1 3.5

Perth 3.2 -2.0

Hobart 1.1 1.0

Darwin 0 1.7

Canberra 1.9 6.5

Australia 0.7 5.8

Source: ABS 6416.0

House Prices - Quarterly Growth


Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

05 06 07 08 09 10

Pe

rce

nt

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Pe

rce

nt

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Australia Brisbane

9

Business confidence bounces; Consumer confidence softer

Australian Confidence

Source: Reuters EcoWin, NAB Business Survey

01 02 03 04 05 06 07 08 09 10 11

Ne

t b

ala

nce

-40

-30

-20

-10

0

10

20

30

Ne

t b

ala

nce

75

80

85

90

95

100

105

110

115

120

125

130

Business Confidence

Business Conditions

Business ConfidenceBusiness ConfidenceBusiness Confidence

Business Confidence (RHS)

Consumer Confidence (LHS)

Consumers cautious: Want to pay down debt or put in the bank

10

Consumer Sentiment: Wisest Place for Savings

Source: W-MI, NAB Global Markets Research, Reuters EcoWin

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

0

10

20

30

40

50P

erc

en

t

0

10

20

30

40

50

Real estate

Banks

Pay off debt/ home mortgage

Shares

Household savings have risen strongly

11

% of Household Disposable Income

Household Saving

Source: NAB Global Markets Research, Reuters EcoWin

84 86 88 90 92 94 96 98 00 02 04 06 08 10

Pe

rce

nt

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5P

erc

en

t

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

12

RBA has been on hold since November, but rises ahead

RBA Cash Rate


92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Pe

rce

nt

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Pe

rce

nt

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

(f)

13

Global activity continues to strengthen

Ann Avg GDP 2008 2009 2010 (f) 2011 (f) 2012 (f)

Australia 2.6 1.3 2.7 2.5 3.7

US 0.0 -2.6 2.8 3.2 3.3

Japan -1.2 -6.3 4.0 1.7 2.3

UK 0.0 -5.0 1.4 2.1 2.2

Eurozone 0.3 -4.0 1.7 1.5 1.8

India 7.3 6.8 9.0 8.4 7.4

China 9.6 9.1 10.3 9.1 8.0

World 2.9 -0.7 4.9 4.5 4.2

Chinese and Indian growth strong despite policy tightenings

14

US recovery continuing, labour market improving (slowly)

15

US Payrolls and Unemployment Rate

Monthly change in Nonfarm payrolls Unemployment RateSource: Reuters EcoWin

05 06 07 08 09 10 11

Pe

rce

nt

4

5

6

7

8

9

10

11

Pe

rso

n (

mill

ion

s)

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50US GDP

Q/Q Annualised Rate Annual %Source: NAB Capital Research, Reuters EcoWin

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

08 09 10

Pe

rce

nt

-10

-8

-6

-4

-2

0

2

4

6

Global manufacturing strong

16

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10

China

US

Europe

UK

Index Index

Manufacturing PMIs

Japanese earthquake – Key issues for Australia

17

● Japan accounts for 20% of metallurgical

coal, 18% of thermal coal and 10% of iron

ore demand

● Areas heavily affected by the earthquake

represent 8% of Japanese GDP

● Japan is 15% of Australia’s trade (China

22.5%), 19% of exports and 9% of

imports. Main exports are coal, iron ore,

beef, aluminium, LNG, nickel, sugar

● In short term, commodity demand will fall

as. large manufacturing plants closed

● Medium term, demand from

reconstruction projects and from coal and

gas fired electricity power stations will

exert upward pressure on commodities

● BoJ injected ¥15 trn into banking system

to ensure plenty of liquidity

Nikkei 225 Index


07 08 09 10 11

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

18000

19000

Index

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

18000

19000

Commodity prices driving ‘terms of trade’ & real incomes higher

18

Aus: Terms of Trade and RBA commodity prices

Source: NAB Global Markets Research, Reuters EcoWin

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Ind

ex

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Ind

ex

30

40

50

60

70

80

90

100

110

120

130

140

Terms of trade (right)

RBA commodity price index (SDR terms, left)

Resource projects ‘committed’ or ‘under construction’:

$A133bn, 10% of GDP

19

Source: Minerals and Energy, Major development projects – October 2010 listing, Michael Lampard et al, ABARE, November 2010

20

Longer term activity outlook remains positive, helped by the

rebuilding after the floods and strong business investment

Australian GDP


00 01 02 03 04 05 06 07 08 09 10 11 12

Pe

rce

nt

-1

0

1

2

3

4

5

Pe

rce

nt

-1

0

1

2

3

4

5

Annual

Quarterly GDP Growth

Domestic Demand

(f)

21

Little spare capacity - unemployment rate is falling

Unemployment Rate

Australia QueenslandSource: Reuters EcoWin

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Pe

rce

nt

3

4

5

6

7

8

9

10

11

12P

erc

en

t

3

4

5

6

7

8

9

10

11

12

(f)

22

Wage pressures rising, and skilled labour shortages after floods

Wage Price Index


97 98 99 00 01 02 03 04 05 06 07 08 09 10

Pe

rce

nt

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0P

erc

en

t

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

Quarterly Growth (RHS) Annual Growth (LHS)

23

Underlying inflationary pressures rising

Australian Inflation

Headline CPI Average Underlying CPISource: Reuters EcoWin

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

%Y

oY

0

1

2

3

4

5

6

7%

Yo

Y

0

1

2

3

4

5

6

7

(f)

AUD has been solid against the major currencies

24

AUD Crosses


04 05 06 07 08 09 10 11

50

60

70

80

90

100

110

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

AUD/JPY (RHS)

AUD/EUR (LHS)

AUD/GBP (LHS)

AUD/USD


03 04 05 06 07 08 09 10 11

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

AU

D/U

SD

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

A higher average for the AUD over the next decade?

25

Australian Dollar


86 88 90 92 94 96 98 00 02 04 06 08 10

AU

D/U

SD

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

AU

D/U

SD

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Average 2004 to 2011: 81c

Pre commodity-boom average: 70c

Post commodity-boom average?

Key financial market forecasts

26

Interest Rate Forecasts

15-Mar Jun-11 Sep-11 Dec-11 Jun-12 Dec-12

Australia

RBA Cash rate 4.75 4.75 5.00 5.25 5.25 5.25

Offshore Policy Rates

US Fed funds 0.25 0.25 0.25 0.50 1.00 2.00

ECB refi rate 1.00 1.25 1.50 1.50 2.00 2.50

BoE repo rate 0.50 0.75 1.00 1.50 2.00 2.50

Exchange Rate Forecasts

Majors 15-Mar Jun-11 Sep-11 Dec-11 Jun-12 Dec-12

AUD/USD 0.9958 1.05 1.01 0.98 0.96 0.94

NZD/USD 0.7318 0.74 0.72 0.73 0.75 0.77

USD/JPY 81.57 86 87 88 92 92

EUR/USD 1.3919 1.38 1.35 1.36 1.38 1.40

GBP/USD 1.6110 1.59 1.58 1.59 1.61 1.65

USD/CNY 6.5714 6.30 6.20 6.15 5.95 5.75

Australian Cross Rates

AUD/JPY 81.23 90 88 86 88 86

AUD/EUR 0.7154 0.76 0.75 0.72 0.70 0.67

AUD/GBP 0.6181 0.66 0.64 0.62 0.60 0.57

AUD/NZD 1.3608 1.43 1.40 1.34 1.28 1.22

AUD/CNY 6.5438 6.62 6.26 6.03 5.71 5.41

Oil and Gold prices rise as Middle-East tensions escalate

$US

Oil and Gold Prices

WTI Crude Oil, Spot Gold, SpotSource: NAB Global Markets Research, Reuters EcoWin

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

US

D/O

z

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

US

D/B

arr

el

10

20

30

40

50

60

70

80

90

100

110

120

130

140

28

Some upside potential for the ASX 200?

ASX 200 vs Company Profits


80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

AS

X 2

00

250

500

1000

2000

4000

8000

Pro

fits

, M

onth

ly (

bill

ions)

2

4

8

16

32

S&P/ASX 200 (RHS)

S&P/ASX 200 (RHS)

Gross Operating Surplus (LHS)

29

But not keeping up with US equity market

ASX 200 vs Dow Jones Industrials

Australia ASX 200 US Dow Jones Industrial IndexSource: Reuters EcoWin

Jan

06

May Sep Jan

07

May Sep Jan

08

May Sep Jan

09

May Sep Jan

10

May Sep Jan

11

Ind

ex

2800

3000

3200

3400

3600

3800

4000

4200

4400

4600

4800

5000

5200

5400

5600

5800

6000

6200

6400

6600

6800

7000

Ind

ex

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

ASX 200 (RHS)

US Dow Jones (LHS)

30

● Global economy is improving and Chinese growth remains strong

● Commodity demand will see strong resource investment in Australia

● Household caution is keeping RBA on hold, for now

● Labour market is strong, and unemployment falling

● RBA cash rate to rise further to contain wage and price pressures

Summary: Risks remain, but interest rates higher in 2011

31

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Australia's Economy after Floods/Earthquakes

Business

Transcript of Australia's Economy after Floods/Earthquakes